The impact of the Federal Budget changes on financial planning clients

Deborah Wixted takes a look at the 2010-11 Federal Budget, and discusses what it will mean for the clients of financial planners.

The Federal Treasurer, Wayne Swan, has handed down his third Budget, promising to return the country to surplus in three years. The Budget reconfirmed the recent Government announcements in response to the Australia’s Future Tax System Review (the Henry Review).

In addition, there were a number of changes to taxation, superannuation and social security benefits.

These changes include lower tax on cash and fixed interest investments, standard deductions for tax returns, constraints on co-contributions, more flexibility to object to excess contributions tax assessments and a number of technical but useful superannuation measures.

This article is a summary of the relevant Budget announcements, and how they may affect your clients.

Taxation

50 per cent savings discount for interest income from 1 July, 2011

The Government plans to provide a 50 per cent tax discount on up to $1,000 of interest earned by individuals, including interest earned on deposits held in authorised deposit taking institutions, bonds, debentures and annuities.

Currently there are relatively higher levels of taxation applying to interest income, compared to other forms of investment income.

The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme, and is expected to benefit around 5.7 million taxpayers in 2011-12.

There will be a flow-on effect for taxpayers claiming the discount for interest income, as they will have a reduced adjusted taxable income.

The Government will consult during 2010-11 on details concerning the operation of the discount, including in relation to the scope of the discount and the mechanism for applying the discount to interest earned indirectly by individuals.

Comment

To generate $1,000 of interest a taxpayer would need savings of $16,667 assuming a 6 per cent interest rate.

As there is no preservation or holding period requirement apparently included in this measure, the 50 per cent savings discount provides an alternative shorter-term savings mechanism, particularly for those affected by super contributions caps.

However, over the longer term the taxation concessions applying to super do provide greater scope for increased savings, as shown in the following comparison.

Standard tax deduction from

1 July 2012

The Government plans to introduce a standard deduction for work-related expenses and the cost of managing tax affairs. The standard deduction will be $500 for the 2012-13 financial year, and then $1,000 for the 2013-14 and subsequent financial years.

Where a person’s deductible expenses exceed the standard deduction amount, they will be able to claim the higher expenses instead of the standard deduction.

Comment

This standard deduction would be available regardless of whether relevant expenditure was actually incurred.

For example, a person who completes their own tax return would be able to claim a deduction for their own efforts.

The standard deduction will translate into a $157.50 saving for a person on a 30 per cent marginal tax rate in the first year of the measure, and a $315 saving in subsequent years.

Capital protected borrowings — increase to benchmark interest rate from 11 May 2010

The Government has proposed to increase the benchmark interest rate that applies to capital protected borrowings to the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points.

Prior to this announcement, the benchmark interest rate was set at the RBA indicator rate for standard variable housing loans.

The Government has confirmed that this measure will apply to capital protected borrowings entered into from 7:30pm (AEST) 13 May, 2008.

Comment

Increasing the benchmark interest rate will allow existing borrowers to claim a larger proportion of the expenses on the borrowings as a deduction, potentially making these products more attractive to some investors.

Managed investment trusts — Government’s response to the Board of Taxation’s review, effective from 1 July 2011

The Government plans to introduce a new taxation regime for Australian managed investment trusts (MITs) in response to the Board of Taxation’s Report on its review of the tax arrangements applying to MITs.

The new regime, among a range of changes, will allow MITs to use an attribution method of taxation (in lieu of the existing present entitlement to income method), as well as allowing unit holders, in some circumstances, to make adjustments to the cost base of their unit holding to eliminate double taxation.

Comment

The new regime should provide more certainty and simplification on taxation of MITs to both the trustees and beneficiaries.

Superannuation

Co-contribution — permanent reduction to matching rate and maximum payable

The matching rate of 100 per cent and the maximum co-contribution that is payable on an individual’s eligible personal non-concessional contribution of $1,000 is proposed to be permanently retained.

Comment

Under announcements made in the 2009 Budget, the co-contribution matching rate was to be reduced from 150 per cent to 100 per cent before being increased to 125 per cent and then back to 150 per cent.

Under the 2010 Budget announcement this planned increase will not proceed and the maximum rate of co-contribution will be capped at $1,000.

The effect of this measure could be a reduction in a person’s final super savings over 35 years of:

• $21,000, compared to the former $1,500 maximum co-contribution
• $16,000, compared to the co-contribution regime in place during 2009-10.

This assumes a nil starting balance, eligibility for the maximum co-contribution on a $1,000 pa non-concessional contribution, 7.5 per cent per annum investment return after fees but before tax, 3 per cent per annum inflation, results adjusted for inflation.

Co-contribution — indexation of income thresholds paused for two years from 1 July 2010

For 2010-11 and 2011-12, the Government plans to freeze the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

The maximum co-contribution of $1,000 is reduced by 3.333 cents for every dollar that a taxpayer’s total income exceeds $31,920 until it reaches or exceeds $61,920.

ATO discretion on excess contributions tax assessments

This measure proposes giving the Commissioner the ability to exercise its discretion prior to an assessment being issued for excess contributions tax.

Comment

Currently, a taxpayer may apply to the Commissioner for a determination that part or all of their excess contributions be disregarded or reallocated to another income year.

Such an application must be made within 60 days of receiving an excess contributions tax assessment, which also includes the taxpayer’s excess contributions tax liability.

This measure would allow an application to be made prior to receiving the assessment, potentially allowing a person to have a decision made before having to pay excess contributions tax.

Superannuation fund deductions for terminal medical conditions benefits from 16 February, 2008

The Government has announced that it will be seeking to extend the number of benefits that are deductible for complying super fund and retirement savings account providers to include terminal medical conditions.

Comment

The measure seeks to address the current anomaly in taxation laws where deductions are only allowed for benefits relating to death, permanent incapacity and temporary incapacity conditions of release. This may increase the availability of terminal medical cover in super and reduce the net cost of such cover to members.

Eligible superannuation contribution deductions extended permanently for successor superannuation funds effective from 1 July 2010

The Government has announced plans to permanently allow a claim for a deduction for eligible contributions to be made to successor superannuation funds.

Comment

This measure would allow a deduction notice to be lodged with a successor fund where the relevant contributions were made to the transferring fund.

Accordingly, it addresses a current inequity in superannuation laws that deny investors a perfectly legitimate tax deduction due to circumstances mainly out of their hands.

Investors do not usually have any control over the transfer of their current benefits from one super fund to another if it is based on a successor fund transfer.

Other amendments to superannuation contributions from 2010-11

The Government will introduce a number of measures to improve the eligibility for a tax deduction on superannuation contributions.

These are:

• To increase the time limit for deductible employer contributions for former employees (currently two months after termination); and
• To clarify the due date of the shortfall interest charge for the purposes of excess contributions tax.

Changes to First Home Owners Savers Accounts (FHSA) scheme from date of assent

The Government proposes that savings in an FHSA can be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account.

The current rules require that FHSA holders keep their savings in an FHSA for four financial years before they are able to use those savings to buy a home.

At present, if an account holder buys a home before the end of that four-year period, the balance of their FHSA must be transferred to their superannuation.

The changes will apply for houses purchased after assent of relevant legislation.

Comment

This measure will allow an earlier access to the savings instead of waiting to meet a condition of release under superannuation rules and the ability to reduce mortgage debt.

Social Security and Family Assistance

Family Tax Benefit non-lodgement suspensions — exemptions

In the 2008 Budget, the Government had proposed to suspend Family Tax Benefit (FTB) payments to people who had not lodged their tax return in 12 months and had not responded to Centrelink requests to do so. This measure will be retained with two exceptions.

Payments will continue to people who do not have any FTB debt, or where ceasing the payments would cause undue hardship.

Family Tax Benefit — A: Strengthening participation requirements from 1 July, 2010

In the 2009 Budget, the Government extended FTB Part A to cover children aged 16-20 who do not have a Year 12 or equivalent qualification, and who participate in full-time education or training, or part-time education or training in combination with other approved activities. Children will now be required to participate in full-time education or training. Part-time education or training will not be sufficient.

Child Care Rebate capped from 1 July, 2010

The Child Care Rebate will be capped at $7,500 per child (2008-09 level) from the current annual cap of $7,778 per child. Indexation of the cap will be paused for four years from 1 July, 2010. The out-of-pocket reimbursement of child-care expenses will remain at 50 per cent up to the annual cap.

Expanded Special Disability Trust criteria from 1 January 2011

The Government will amend the eligibility criteria and allowable uses for Special Disability Trusts (SDTs). The definition of a beneficiary will be expanded to include people with a disability who can work up to seven hours per week.

The allowable uses for the trust will be expanded to include all medical expenses, including membership costs of private health funds, maintenance expenses of SDT property and discretionary spending of up to $10,000 per year.

Disability Support Pension: refined assessment process

When determining eligibility for the Disability Support Pension (DSP), Centrelink will have a greater focus on the individual’s potential to work.

Claimants who do not have sufficient evidence to demonstrate that they cannot be helped get back to work will have their DSP claim rejected and will instead be referred to an employment service to build their employment capacity.

Claimants who are clearly unable to work will not be affected, including those with profound disability, serious medical conditions or terminal illness.

In addition to these changes from 1 July, 2010, assessment for the DSP will be simplified to fast-track more claimants who are clearly eligible due to a cancer, congenital or catastrophic disability.

Deborah Wixted is head of technical services at Colonial First State.